Way to reduce IHT on large property

[ksmith20]

Hello, I was considering investigating whether a company could be set up to provide the following service. The best way to explain is if I give an example:

Say there is an elderly lone man living in a house worth £2m and no other assets. He wants to stay in his house for the rest of his life but wants to mitigate any IHT to his young son.

Could a third party company be set up to loan, say, £1.5m to the elderly man for, if necessary for tax reasons, a fee. The elderly relative gifts that money to his son. The son then deposits that money back with the third party company. So effectively a debt is created against the old man, the company earns a commercial fee, if necessary, but does not have exposure (as there is full trust in the family of no defaulting).

I understand for it to work fully he must survive 7 years but that should be the case and, if not, then the benefit would reduce proportionately.

Is this a legal operation to mitigate IHT?

Two items, in particular, I'm not sure on are:

1) Would commercial rates of interest have to be charged? I would not have thought so because banks take money for no interest and also lend at very low rates as well. In effect they lend and borrow at rates to balance their books which is what is being done in this case. The company could still makes money if necessary by charging a flat fee.

2) Could the terms of the deposit from the son be made that repayment is only on father's death?

I would really appreciate any advice you may be able to give on this.

Many thanks in advance.

[Arnold Aaron]

Why not lend the sum and then the father enter into an IHt 'extraction vechicle', for example a Discounted Gift Trust. This will give him income, with which he can service the laon with, and there is an immediate reduction in IHT on day 1.

It essentially, but quite legitimately, allows one to gift away capital to mitigate IHT, but at the same time enjoy a generous 'income' for it for life.

You can read more on the Discounted Gift Trust on this website.

http://www.taxationweb.co.uk/tax-articles/capital-taxes/the-discounted-gift-trust.html

Feel free to contact me for clarification.

[Arnold Aaron]

By the way, on looking at your post more closely, I believe that making a gift repayable on death is quite legal, but I would advise you seek tax advice from a solicitor specialising in trusts and tax on the structure of your proposal - there are a few on this website who regularly contribute to the forums.

The discounted gift scheme method as suggested in my previous post should achieve this and its non-contentious tax planning.

[maths]

As it would appear that there are arrangements under which the "bank" lends to X, presumably on condition X gives monies to Y who redeposits monies with the "bank", then the debt incurred by X will not, I suspect, rank as a deductible liability for IHT purposes due to the artificial debt rule in s103 FA 1986.

A simple borrowing by X who gifts outright to Y would be a deductible debt for X.